Treasury admits traditional financial regulation won’t work for all crypto

The Labor government has finally released its ‘token mapping’ cryptocurrency regulation consultation paper. It outlines a multi-stage approach to the issue but acknowledges the incompatibility of traditional financial services regulation with certain cryptocurrency products.

The paper was released on Friday, alongside a joint statement by Treasurer Jim Chalmers and Financial Services Minister Stephen Jones. The ministers highlighted three key areas in the government’s approach to cryptocurrency — strengthening enforcement action, bolstering consumer protection and establishing a framework for reform.

A long time coming

The government first announced its token mapping exercise back in August to “help identify how crypto assets and related services should be regulated”. The term itself essentially means figuring out which regulatory framework will be appropriate for each type of crypto asset.

No solid timeframe was announced at the time, but Labor did take aim at the previous government for not doing much in the crypto regulatory space. And it has continued to do so with the release of crypto mapping consultation paper.

“The previous government dabbled in crypto policy but never took the time to future‑proof our regulatory frameworks to protect consumers and guide this new and emerging class of assets,” Chalmers and Jones said in their joint statement.

“We are acting swiftly and methodically to ensure that consumers are adequately protected and true innovation can flourish.”

Party potshots aside, the consultation paper release may have been sped along by fallout from FTX’s collapse back in November.

A lot happened there, up to and including a polycule. But as a basic recap, the cryptocurrency exchange filed for bankruptcy in the US after a proposed acquisition from Binance fell through. FTX customers found that their accounts were frozen and US$10 billion was transferred off the exchange to be leveraged by another.

There was more to it, including liquidity issues and shady dealings, but the collapse sent a ripple effect through the industry. And this was a big deal because crypto was already teetering on a knife’s edge throughout thanks to the ongoing global economic issues and bear market.

We even said that the industry-wide impact of its demise was further proof of how desperately we need robust crypto regulation in Australia. Lack of regulation not has allowed for crypto advertisements, scams and spamming to run rampant. ASIC revealed a 600% rise in complaints against suspicious crypto companies back in November.

In addition, it also leaves fledgling investors exposed.

For example, a lot of punters are unaware that cryptocurrency exchange pools are unregulated. This means that if you buy cryptocurrency on an exchange and let them sit there, you don’t own those coins. Instead, you have an account that simply gives you a reflection of what their value is.

So if an exchange was to shut down while you had assets sitting on it, customers wouldn’t have any legal recourse

The Token Mapping consultation paper acknowledges that crypto is complicated

The consultation paper itself is 59 pages long and delves into how cryptocurrency should be regulated and how much of it can be drawn from traditional financial ordinances.

And most of it probably can be. According to the paper, the majority of crypto-related businesses are “offering products that relate to crypto assets… or businesses creating crypto assets that relate to existing non-crypto products.”

Anything that involves “promises, intermediaries and agents” would fall into this category and can potentially be mapped to traditional financial regulation. The consultation paper refers to these types of products as “intermediated token systems”.

Some examples of this could be a crypto exchange or a business that offers interest in crypto investments, such as Swyftx Earn or Finder Earn. This is because there is a direct link between fiat currency being exchanged with a crypto network or token.

But things get a little messier when it comes to crypto products that “have clear non-financial functions”. This gets into the area of blockchain and crypto tokens that isn’t directly related to money.

Because despite wide public perception, cryptocurrency wasn’t designed to simply be a digital alternative to traditional currencies. Nor was it supposed to just be a vehicle for potential profit.

As the consultation paper notes, tokens can be used for things like “document provenance, digital identity, general record keeping, data storage and event ticketing”. Smart contracts are another big consideration in this space.

The paper refers to these types of crypto assets as “public token systems” as they don’t necessarily involve promises, intermediaries or agents. This is due to the blockchain network they exist on potentially being self-sufficient, with all transactions occurring on-chain. The paper acknowledges that there isn’t just one blockchain (though ‘the blockchain’ is still a prevalent phrase online) and they aren’t all built equal.

“Whether or not cryptocurrency network tokens involve financial products will depend on each individual network. They are not all sufficiently alike to consider them together,” the paper reads.

“While traditional policy and regulatory levers are available for a large portion of the crypto ecosystem (i.e. intermediated token systems), in the pockets of the ecosystem where functions are truly being ensured by public, self-service software, a fundamentally different approach may be required.”

The consultation period will be open until March and according to Chalmers and Jones the “design of a custody and licensing framework will begin in mid‑2023 to allow for sufficient consultation prior to the introduction of legislation.”

In the meantime, the Australian Securities and Investments Commission has increased its crypto team after announcing a crackdown on crypto at its Annual Forum in late 2022.